Just when it seemed the Association of Southeast Asian Nations (ASEAN) was united in its desire to establish a cohesive, rules-based economic bloc, a series of bilateral trade and investment spats has sent the 10-member regional grouping careering back toward collective irrelevance - only this time to potentially disastrous effect. ASEAN members agreed last month to fast-track the establishment of a long-discussed regional free-trade area, moving up the timetable by five years for eliminating tariffs and promoting the free flow of capital across regional borders from 2020 to 2015. More significant, ASEAN also unanimously approved a blueprint to transform the informal grouping into a legally defined entity, giving it the central authority to impose sanctions on members that break its rules and regulations.

Those were unusually bold moves for ASEAN, which throughout its 40-year existence has served more as a regional talk shop than a venue for hammering out binding trade and investment agreements. Formed loosely in 1967 to promote regional security, culture exchanges and economic prosperity, an expanded ASEAN now represents the region's best hope of engaging and counterbalancing China's economic rise on a somewhat equal basis. It includes Thailand, Malaysia, Singapore, Vietnam, Indonesia, the Philippines, Cambodia, Laos, Myanmar and Brunei.

Last year, ASEAN agreed in principle to establish a free-trade agreement with China, which by 2010 should represent the world's largest free-trade area, eclipsing both the European Union and the North American Free Trade Area. It was a deal that ASEAN's comparatively smaller economies could not refuse, but one that China could still go lukewarm on if the underlying conditions shift - as recent protectionist lurches across the region seem to indicate.

China's total investment in ASEAN last year reached US$1.3 billion, including $200 million in new capital outlays in 2006, according to Chinese Ministry of Commerce official statistics. Meanwhile, Sino-ASEAN trade hit a record high of $160.8 billion last year, up 23% year on year, and is projected to rise to about $170 billion this year. China is now on pace to become the region's largest trade partner, surpassing the United States, by year's end.

Behind those statistics, however, China still represents a potent threat to the region's transitional economies. Beijing's proven track record of luring away big foreign investments once destined for Southeast Asia is slowly but surely pushing the region down the value-added ladder as a mere raw-materials and commodity-providing link in China's emerging global manufacturing supply chain.(1) Ever since the 1997-98 Asian financial crisis, China's huge unified market has provided multinational manufacturers the economies-of-scale benefits with which ASEAN's still-fragmented markets cannot compete. While Thailand's, Indonesia's, Malaysia's and Singapore's relative economic openness were good enough to win big export-oriented foreign investments throughout the mid-1980s and 1990s, that's clearly no longer the case as Asian governments now nearly universally embrace free-market economics.

Faster economic and financial integration are therefore crucial in resurrecting and maintaining Southeast Asia's attractiveness to foreign investors - an urgent conclusion that the grouping's economic ministers' meeting came to belatedly in January.

Contrarian signals

Yet while ASEAN publicly pronounces plans for fast-track liberalization, its individual members are sending contrarian protectionist signals. Thailand in particular has recently implemented policies, including controversial capital controls on certain types of foreign investments, that are at direct odds with ASEAN's now-invigorated liberalization drive. A recent Bloomberg report that referred to an Australia and New Zealand note to clients hinted that Vietnam may soon implement similar capital controls on foreign equity transactions to cool speculation on the stock market.

But a handful of politically charged trade and investment rows among the regional grouping's key members are raising the hardest questions about individual countries' political commitment to moving toward ASEAN's plans for rules-based economic union. Capital-flush Singapore, which is already making the sort of investments in the region ASEAN says it hopes to encourage, has significantly emerged as the region's whipping boy.

Thailand's and Singapore's escalating row over the island state's politically charged $1.9 billion acquisition of Shin Corp last year represents the most heated and potentially damaging case in point. Thailand's inward-looking ruling junta has repeatedly said that Singapore's ownership of a communications satellite operated through a government concession undermines national security, and military leaders have vaguely threatened to nationalize the assets.

In Indonesia, meanwhile, nationalistic politicians have alleged that Singapore's investments in two local telecommunication companies could be in violation of local anti-monopoly laws - more than four years after the multimillion-dollar transactions were signed and sealed. Indonesia also recently imposed a ban on exporting sand to the neighboring island state, which uses the fill for land-reclamation projects. Indonesia's protectionist move follows a similar Malaysian boycott on sand exports to Singapore.
To be sure, bilateral spats have always complicated ASEAN's stated intention of developing a cohesive and coherent regional marketplace. That's largely because most member states trade very little among one another and instead compete head-to-head for similar global markets, particularly in textile, electronics and commodity exports. Intra-regional trade has for decades hovered around 20-25% of ASEAN's total trade, of which bilateral Malaysia-Singapore trade accounts for about 40%.

Those structural barriers have made integration both less beneficial and more difficult to achieve over both the short and medium terms. But the nationalistic essence of the latest round of spats, which significantly hinges on cross-border investments rather than trade in particular products, represents a worrying turn that threatens to undermine ASEAN's broader liberalization aim of encouraging more foreign and particularly Chinese investments into the region.

Racial dimension

Bangkok's spat with Singapore, in which the former's military leaders have publicly accused the island state of violating its national sovereignty through its investments in communications infrastructure including satellites, is deeply enmeshed with Thailand's unfolding and unresolved political crisis.

Thailand's ruling generals have in effect ordered into bankruptcy the television station ousted prime minister Thaksin Shinawatra's family sold last year to Singapore's Temasek, demanding more than $2 billion in fines and delinquent fees. They are now threatening to follow up by rescinding the build-operate-transfer concession held by Advanced Info Services, Shin Corp's money-spinning mobile-telephone company now owned by Temasek. The latter move would render Singapore's $1.9 billion investment in the conglomerate almost worthless and raise questions about whether the move represents a full-blown expropriation of a foreign investment. As currently constituted, Singapore would have little recourse through ASEAN's untested dispute-settlement mechanism, which historically has shied away from mediating in regional economic disputes.(2)

Singapore's ongoing rows with Malaysia and Indonesia, on the other hand, have a potentially harsher undercurrent. Though it is unstated by government officials and unexplored by the regional mainstream media, some observers believe there is an implicit element of anti-Chinese sentiment in Indonesia's and Malaysia's current protectionist rumblings against Singapore, where about 80% of the population is ethnically Chinese. Southeast Asia's minority ethnic-Chinese diaspora has historically kept a low profile in its adopted countries - particularly in Indonesia, where it represents about 2% of the population but controls large swaths of the country's production. But Chinese have more recently started to assert their ethnic identity with greater public confidence as mainland China gains more regional influence. It's a social trend nationalistic politicians across the region have no doubt noted.

If now-simmering nationalistic sentiments were to boil over into overt anti-Chinese sentiments and actions, as was the case in the anti-Chinese pogroms that swept Indonesia in 1998,(3) Beijing would no doubt have second thoughts about deepening its financial commitments to ASEAN - crucially at a point when China is aggressively investing overseas. Underscoring that point, Beijing has played a significant behind-the-scenes role in trying to reconcile Jakarta with various ethnic-Chinese Indonesians who fled the country with their capital for Singapore in the wake of the 1998 violence.

Significantly, protectionist sentiments are now being stoked in the very ASEAN countries that throughout the 1980s and into the 1990s served as regional showcases for the benefits of economic openness. Now, never have the economic rifts opening between certain ASEAN member states been articulated in such nationalistic and acrimonious terms. And arguably never has the backsliding come at such a critical juncture in the region's fast-shifting economic evolution.

Footnotes

(1) China's emergence as a low-cost producer continues to hollow out Thailand's industrial base, pushing its export-geared economy further down the value-added ladder. Thailand's National Statistical Office recently released statistics showing that manufacturing employment fell by 30,000 year on year last December, while lower-earning agriculture-based employment increased by 60,000.

(2) ASEAN's Secretariat declined to take on a case in 2000 petitioned by a Singapore-based investor who allegedly had her joint-venture investment in the Mandalay Brewery seized at gunpoint in November 1998 by Myanmar's military government. ASEAN officials at the time justified their inaction by saying the investor had failed to file the complaint through "proper channels".

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